In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at ConocoPhillips's (NYSE:COP) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, ConocoPhillips's P/E ratio is 9.25. That means that at current prices, buyers pay $9.25 for every $1 in trailing yearly profits.
Check out our latest analysis for ConocoPhillips
How Do You Calculate ConocoPhillips's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for ConocoPhillips:
P/E of 9.25 = $57.68 ÷ $6.24 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does ConocoPhillips Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that ConocoPhillips has a P/E ratio that is roughly in line with the oil and gas industry average (9.6).
That indicates that the market expects ConocoPhillips will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, ConocoPhillips grew EPS like Taylor Swift grew her fan base back in 2010; the 64% gain was both fast and well deserved.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.